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Cedar Fair L. P. (NYSE:FUN)

Q2 2012 Earnings Call

August 09, 2012 10:00 a.m. ET

Executives

Stacy Frole – Director, IR

Matthew Ouimet – President & CEO

Brian Witherow – EVP & CFO

Richard Zimmerman – COO

Analysts

Paul Patterson – Glenrock Associates

Ali Agha - SunTrust Robinson Humphrey

Ashar Khan - Visium Asset Management

Michael Jin – Epoch Investment Partners

Steven Gambuzza - Millennium Partners

Sri Raja – Deutsche Bank

Michael Walsh – Wells Fargo

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Cedar Fair Second Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today, Thursday, August 09, 2012.

I would now like to turn the conference over to Stacy Frole, Director of Investor Relations. Please go ahead.

Stacy Frole

Thank you Fudayo [ph]. Good morning, and welcome to our second quarter earnings conference call. I’m Stacy Frole, Cedar Fair’s Director of Investor Relations. Earlier this morning, we issued our 2012 second quarter earnings release.

A copy of that release can be obtained on our corporate website at www.cedarfair.com or by contacting our Investor Relations Offices at 419-627-2233. On the call this morning are Matt Ouimet, our President and Chief Executive Officer; and Brian Witherow, our Executive Vice President and Chief Financial Officer. Richard Zimmerman, our Chief Operating Officer, is also with us today for the call.

Before we begin, I need to caution you that comments made during this call will include forward-looking statements within the meaning of the Federal Securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. You may refer to filings by the company with the SEC for a more detailed discussion of these risks. In addition, in accordance with Regulation G, non-GAAP financial measures used on the conference call today are required to be reconciled to the most directly comparable GAAP measures.

During today’s call we will make reference to adjusted EBITDA as defined in our earnings release. The required reconciliation of adjusted EBITDA is in the earnings release and is also available to investors on our website via the conference call access page. In compliance with SEC Regulation FD, this webcast is being made available to the media and the general public, as well as analysts and investors.

Because the webcast is open to all constituents and prior notification has been widely and unselectively disseminated, all content of the call will be considered fully disclosed.

Now I will turn the call over to Matt Ouimet.

Matt Ouimet

Thank you Stacy, and good morning, everyone. As we enter the final third of our operating season, I am pleased to report that results remain strong and our outlook positive. Based on our year-to-date results through this past weekend we are on target for another record year in 2012. This would be our third consecutive year of record-setting performance.

Brian will review the details behind the results through the second quarter in just a bit, but first I would like to briefly comment on our performance to-date. Based on preliminary results through this past Sunday, August 5th, year-to-date revenues have increased 3% or $21 million when compared with Sunday August 7, 2011. This increase reflects a 4% or $1.46 increase in average in-park guest per capita spending and a 2% or $1 million increase in the out of park revenues.

Year-to-date, attendants at our parks through this past weekend was comparable to the record setting performance of a year ago. While we are pleased with the strength of our revenue growth as a result of our increased per capita spending, I would first like to address our recent attendance trends.

Performance in July 2011 was unusually strong, presenting difficult year-over-year comparisons. While this was largely anticipated, we were further impacted by the extended heat and accompanying storms in the east and mid-west. The combination of these factors explains why our year-to-date attendance is now flat to the high bar we set in the prior year.

While we believe our unit holders appreciate performance updates throughout our operating season, it is important to remember that such abbreviated snapshots cannot be readily extrapolated to the full year. History has shown us that extreme weather conditions typically average out over the course of the full operating season and as we have seen a return to more normal weather patterns over the past couple of weeks we have seen attendance begin to normalize as well.

While this year’s attendance through August 5th is essentially flat compared with the record attendance of the prior year, our new initiatives have allowed us to drive strong guest per capita spending levels and to grow our revenues. We remain positive that we are on track to meet our guidance of full year to net revenues between $1.055 billion and $1.075 billion and adjusted EBITDA between $385 million and $395 million.

A little over six months ago we unveiled to investors our FUN forward long term growth strategy which included six key growth initiatives. Through these key initiatives we expect to grow adjusted EBITDA to $450 million by 2016. While we are only a little more than three months into the operational execution of this plan, we remain confident in our ability to meet these expectations.

One of these initiatives in enhanced guest experience focuses on delivering a compelling value for the price paid at every park every day. We believe one of the best metrics in determining its success with this initiative is a Net Promoter Score or NPS. For those of you not familiar with NPS, it is a customer relationship metric based on the fundamental perspective that every company’s customers can be divided into three categories: promoters, passive and detractors.

By asking one simple question how likely would you be to recommend one of our parks to a friend or colleague, we can track these groups and get a clear measure of our park’s performance through our customer’s eyes. While we’ve always had guest satisfaction surveys, this specific metric we began tracking only this year, so I'm unable to speak to year-over-year or historic trends. However, I'm pleased to say that the initial surveys of our customers showed very strong NPS that are individual properties.

In fact the NPS is some of our largest properties including our flagship park, Cedar Point known as the Rollercoaster Capital of the World, are some of the best that I have seen in my many years of tracking NPS. We hope to continue to improve on these already strong scores has become even smarter and more attuned to our guests through these new survey results.

Another initiative improving consumer messaging is focused on breaking through the noise in the market place and driving urgency with our guest during the operating season. Our Thrills Connect marketing campaign launched in February is an example of the improved consumer messaging. This campaign takes advantage of the existing strong emotional [inaudible] and multi-generational memories of parks and supports pricing growth even in difficult economic times. We are also extremely proud of our record results in season half sales which stem from the success of our dynamic pricing and advanced purchase commitment initiatives.

A key driver of this initiative is our new e-commerce platform that we launched at the beginning of the year. We stated at this time that this new platform was designed to support incremental programs such as season pass installment sales, and enable further intelligent up selling of benefits and value oriented products. As a result we have already achieved record setting season pass sales both in the number of units sold and revenues.

In fact season pass sales through this past weekend are up 13% in terms of units and 20% in terms of revenues from this same time last year. The installment payment program we added this year certainly has been a major contributing factor to our strong sales growth. We believe we will continue to benefit from this new platform in the coming years and we look forward to announcing new programs and options for guests over the next several months as we begin to roll out our 2013 season pass program.

Our advanced ticket and product sales have also increased year-over-year under the new e-commerce platform. With our year-to-date e-commerce revenues up more than 35% year-over-year. We certainly believe these increased advance sales have contributed to the increased gas spent I mentioned earlier and they underscore the importance of advanced purchase commitment as our best hedge against uncontrollable external factors such as time, property, and unfavorable weather conditions.

Premium product offerings are also contributing to the increase in our in-park guest spent. The highlight of these offerings in the short term is clearly fast lane which is an additional ticket that may be purchased by our guest to move them closer to the front of the line for some of our signature attractions. This is a new program for us this year and it has been very well received by the guest. We will continue to monitor its impact on the guest experience and operational efficiency. The introduction of new signature rides and attractions in future will allow us to expand the capacity of this program and drive incremental growth in our fast lane programs over the long term.

Collectively our fun-forward initiatives have resonated very well with our guests and they have clearly began to pay dividends for us as evidenced by the 4% increase in the average in-park guest per capita spending. The recognizable improvement in the overall guest experience has allowed us to better yield manage our admissions pricing where we have experienced steady growth year-over-year. Even with the strong growth in our season pass program which typically puts downward pressure on the admissions per cap. Through this past weekend our year-to-date admissions per cap was up 3% over the prior year.

Finally, we are nearing the completion of our strategic reviews of each of our individual properties including our long term capital plans. I must say that these reviews make me even more confident in the capital projects we have planned for next year. You will begin to see our parks announce these new offerings as early as next week and over the next several months. I look forward to talking with you in more detail about our 2013 capital plan and our third quarter call.

Now, I’d like to turn the call over to Brian to discuss our financial results in more detail. Brian?

Brian Witherow

Thanks Matt, and good morning to everyone on the call. First I want to remind you that virtually all of the revenues from our seasonal amusement parks, water parks, and other resort facilities are realized during a 130 to 140 day operating period beginning in the second quarter. With the majority of the revenues concentrated in the third quarter during the peak vacation months of July and August.

Only Knott’s Berry Farm and Castaway Bay are open year round and both of those properties also operate at their highest level of attendance during the third quarter. Thus I will caution you that it’s always risky to jump to any conclusions about full year results based on second quarter numbers alone. As of last Sunday, August 5th approximately one-third of our operating days are still to come.

Also as noted in our release our 2012 fiscal results are not directly comparable to the prior year second quarter as the current periods include an additional week due to the timing of the fiscal second quarter close. Since material differences in our statements of operations are partly due to the additional week or 106 total operating days across all of our products combined, I will also discuss operating results based on the comparable 14 week periods ended July 1, 2012 and July 3, 2011.

As Matt mentioned at the beginning of the call and is detailed in our earnings release this morning we had another strong quarter with meaningful increases in both attendance and revenues. For the second quarter 2012 we reported revenues of $357.6 million, up from $284.5 million a year ago with a portion of the increase directly attributable to the extra week in the current quarter.

On a comparable number of operating weeks, second quarter revenues would have been up $19 million or 6% year-over-year. This solid revenue growth was a direct result of a 3% or 218,000 visit increase in attendance, a 3% or $1.09 increase in average in-park guest per capita spending and a 7% or $2.3 million in out of park revenues.

It’s important to note that in-park guest per capita spending represents the amount spent per attendee to gain admission to our parks plus all amount spent while inside the park gates. Out of park revenues primarily represent the sale of hotel rooms, food, merchandize and other complimentary activities outside the park gates and those revenues are excluded from our guest per capita figures.

The strong growth in guest per capita spending for the quarter came from a 2% increase in pure in-park guest spending combined with a 3% increase in admissions revenue per capita. As Matt mentioned earlier, we are extremely pleased with the gains in both areas, particularly given the success of our season pass initiatives, which would naturally put pressure on average per capita spending as season pass holders typically spend less with each incremental visit.

As a result of the record season pass sales, deferred revenue at the end of the second quarter was $108.5 million as compared to $95.7 million from the second quarter of 2011, representing an increase of roughly $12.8 million. This revenue will ultimately be recognized in the third and fourth quarters.

Operating costs and expenses during the second quarter of 2012 were $223.2 million, up from $189.3 million for the second quarter last year. On a comparable number of operating weeks, second quarter operating costs and expenses would have increased $12.3 million or 6%. A largely anticipated year-over-year increase in costs and expenses was the results of incremental cost to support the company’s FUN forward growth initiatives including our new e-commerce platform and technology infrastructure improvements.

During the quarter we also saw an increase in employment related costs due largely to an increase in seasonal labor to support some of our premium benefit offerings, normal merit based increases [inaudible] employees, and increase in wage expense related to equity based compensation plans. The increase in wage expense related to our equity based compensation plans resulted from the significant increase in market price of our units during the quarter. These current quarter operating costs increases were partially offset by higher legal and professional costs during the second quarter of 2011.

Adjusted EBITDA, which we believe is a meaningful measure of park level operating results increased to a record $135 million in the second quarter of 2012 from $95.9 million in 2011. On a comparable period basis adjusted EBITDA for the quarter would have still been approximately $6.5 million or 5%. This increase is primarily attributable to the strong revenue and attendance trends experienced by our parks in the second quarter.

Six month adjusted EBITDA was $73.2 million compared with $36.7 million a year ago, and on a comparable number of operating weeks would have been up 6% year-over-year. Adjusted EBITDA on a trailing 12-month basis was $411 million as of the end of the second quarter. However, it’s important to note that this is based on a 53 week period. As Matt mentioned earlier, we currently anticipate adjusted EBITDA for the full year of 2012, which will be based on a 52 week basis to be between $385 million and $395 million.

Turning our attention to year-to-date results through August 5th, positive revenue trends have continued through July. On a year-to-date and comparable operating day basis, total revenues were up approximately $21 million or 3% year-over-year through this past weekend.

Over the same period, average in-park guest per capita spending at our parks was up 4% or $1.46 on the continued strength of our improved consumer marketing initiatives, our pricing initiatives and our premium benefit offerings. Year-to-date attendance for this past weekend was flat with the same period a year ago while off-park revenues were up 2% or roughly $1 million.

Turing to the balance sheet for just a moment, with respect to both liquidity and capital resources, we ended the second quarter in sound condition. Our receivables and inventories are at acceptable seasonal levels and we have credit facilities in place to fund current liabilities, capital expenditures and operating expenses as needed.

At the end of the second quarter, we had $1.14 billion of variable rate debt of which $800 million had been converted to fixed rates through several swap agreements. We also had $400.6 million of fixed rate bonds, $111 million in borrowings under our revolving credit facilities and $35.9 million in cash on hand.

I will note that the revolver was fully repaid as of August 6th and there are no current maturities scheduled on our long term debt. For the full year we expect to pay approximately $100 million in cash interest costs in 2012, which is a decrease of approximately $50 million from 2011. Based on these cash interest savings coupled with our current performance and full year business outlook we expect to pay a record distribution of more than $2 per limited partner unit in 2013.

As we previously stated, we do not anticipate making a final decision on our 2013 distribution rate until after our important fall season is complete and we have better visibility on our 2012 full year results.

At this time we would like to open up the call to your questions. Fudayo?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question and answer session. [Operator Instructions] Our first question is from the line of Phil Anderson with Longbow Research. Please go ahead.

Phil Anderson – Longbow Research

Yes, good morning and great quarter guys. You have talked about a lot of different initiatives, the Fastpass, [inaudible] all the different sort of initiatives you had going over the next couple of years. Just curious – I think you said in the past that those would have a bigger impact on 2013 and 2012 with these per capita increases. Does that indicate that you had a schedule or are you expecting some additional upside from the growth we have seen so far?

Matthew Ouimet

Yeah it’s a fair question. What I would say broadly is we are very happy with the traction we are getting on a number of initiatives particularly the dynamic pricing and the premium benefit offerings along with our season pass. They are all ramping up at a different pace. I will tell you, things like fast lane are coming together probably quicker than other things. But at the same time they are all at – I would say all are at our expectation or exceeding our expectation slightly at this point.

Phil Anderson – Longbow Research

Okay. And then looking at sort of the calendar here, you guys obviously had an additional operating week in this quarter. Is that – do you give that back one of the remaining two quarters of the year or is this year a week longer from the operating standpoint?

Brian Witherow

No Phil. Those operating days will reverse and be given back in the third and fourth quarters.

Phil Anderson – Longbow Research

So it’s spread over two?

Brian Witherow

Correct.

Phil Anderson – Longbow Research

Okay. And then finally just wondering if there is any additional color you can give us around the 4% increase you have seen in the per cap so far, if there are particular initiatives that apply to an outsized role in that or just any additional color that you could give us there?

Matthew Ouimet

Hi there. You know Bill what I would say and as Brian touched on it that after front gate from an admission per cap standpoint we are up 3% and I give that – the lion share of that credit goes to our dynamic pricing and the capabilities provided by our e-commerce platform. We are – it’s not really weekly, it’s more daily looking at our pricing these days and having that platform available to do strictly fan stalkers that meet our objectives has clearly – we have seen that benefit, and it’s clearly playing through the admission per cap.

Phil Anderson – Longbow Research

Okay great. That’s all I had, thanks.

Operator

Thank you. Our next question is from the line of Sri Raja with Deutsche Bank. Please go ahead.

Sri Raja – Deutsche Bank

Congratulations on a good quarter. I know results through August 5th speaks for itself. But given other consumer discretionary businesses talk about a pull back in spending, what are you seeing in terms of your consumer – I know you did take pricing action in some of the parks but what is the overall reactions been?

Matthew Ouimet

You know, it’s a great question because we are asking ourselves whether there is something else out there that we haven't seen. And quite honestly we haven't seen a pull back from the consumer. The people who are coming are spending money as evidenced by the per caps, and candidly, without overstating it, it really was a tough year-over-year comparison in July and the weather had an impact. So the macro that’s out there at least in the media has not yet rolled through us.

Sri Raja – Deutsche Bank

Great. Do you think it’s a combination of the priced value proposition that you offer or is it generally loyalty to the brand?

Matthew Ouimet

I believe, as I know others in the industry do these days, we continue to provide a compelling price value option for consumers. And that is playing itself favorably with us in two points. One is the overall season pass growth which has been dramatic, which is real strong value proposition for the consumers and the opportunities for them to make that purchase in installment payments which we first introduced this year, which I think plays to the fact, okay, it’s a great value proposition, finally a way to budget it and we’ve been able to address both of those issues.

Sri Raja – Deutsche Bank

All right, that's all I had, thank you.

Operator

Thank you. [Operator Instruction] We have a question from the line of Michael Walsh with Wells Fargo. Please go ahead.

Michael Walsh – Wells Fargo

Good morning. Just filling in here for Tim. Now, I think you made it clear at the beginning of the call that what gives you guys confidence and reiterating your guidance for the rest of the year is weather is going to even out over the full year. It sounds like July was pretty tough with the hot temperatures and some other weather disruption. And then your initiatives are starting to gain traction, is that kind of how to think about it?

Matthew Ouimet

Yeah I think Michael. You know there is two things in this business, two key levers, right. One is your per cap, the other is admissions. What I have been pleased about, uncontrollable factors are by definition uncontrollable. But having the new initiatives in place during this particularly difficult period has clearly shown us value. As it relates to our – confirming our guidance for the year, the strength of our per cap, the growth in our season pass program with deferred revenue as Brian mentioned, still sitting in the balance sheet a substantial portion that increase still sitting in the balance sheet along with our high confidence in both the value proposition as well as the quality of the product for Halloween hot season, allows us to confirm our guidance with a good degree of confidence.

Michael Walsh – Wells Fargo

Got you, thank you.

Operator

Thank you and I am showing no additional questions at this time, please continue.

Matthew Ouimet

Well, first of all, thank you for joining us this morning and thank you for the questions. In closing we have a plan in place and as you can see we are executing on the plan. We are pleased with our results today and remain committed to the opportunities before us in the long term successes of this company. We will continue to actively engage both existing and new investors and look forward to updating you on our progress.

In the mean time I hope you and your families will have the opportunity to visit one or more of our parks this summer, so you can enjoy firsthand the experience and the value that we have been talking about today. Stacy, I will turn it back over to you.

Stacy Frole

Thank you. Thanks everyone for joining us on the call today. Should you have any follow up questions please feel free to call me at 419-627-2227 and we look forward to speaking with again in about three months discuss our third quarter results.

Operator

Thank you all ladies and gentlemen that does conclude our conference for today. Thank you for your participation, you may now disconnect.

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